UBS's Friedman to Investors: Avoid Risk; Fiscal Cliff Has Plenty

UBS AG Chief Investment Officer Alexander Friedman recommends investors refrain from adding risk to their portfolios before the U.S. reaches agreement to avert more than $600 billion in spending cuts and tax increases scheduled to begin on Jan. 1.

“We should not delude ourselves: this is a real risk,” Friedman said in his monthly letter to UBS client advisers Thursday. “If you and I had dinner and then I offered to give you a ride home and said there might be a 10-20 percent chance I would crash the car, would you come with me? I doubt it.”

Three out of four global investors expect President Barack Obama and congressional leaders to reach a short-term agreement to avert the so-called fiscal cliff, according to a Bloomberg Global Poll conducted on Nov. 27. Only 6 percent of investors anticipate a political impasse that would send the U.S. economy into a recession, according to the poll, which surveyed 862 Bloomberg customers who are investors, traders or analysts.

“The main argument for not going over the cliff is political self-preservation,” Friedman wrote. “A recession would be a disaster for the U.S. economic recovery and politicians in both parties appear to understand this.”

If the situation is resolved, markets would probably rally on the news, he wrote, adding that UBS would be likely to raise its recommendation on equities to overweight from neutral. This could be implemented by closing the bank’s existing underweight positions in Australia and Canada, while keeping the current overweight positions in the U.S. and emerging market equities, Friedman wrote.